Pound falls as wage squeeze keeps interest rates on hold

THE pound fell yesterday as financial markets bet on the Bank of England leaving interest rates unchanged until 2015.

The pound fell as markets Bet on the bank of England keeping interest rates the same until 2015 [GETTY ]

A sharp slowdown in wage growth prompted the Bank to scale back its inflation forecasts, increasing the likelihood that it will delay a rise in the cost of borrowing until the new year.

Sterling fell to a 16-week low against the US dollar and a six-week low against the euro, bringing some relief to hard-pressed British exporters.

It touched $1.6716 against the greenback, compared to July’s six-year high of $1.7192 and dropped to €1.248 against the single currency compared to last month’s four-year high of €1.267. The pound’s dip followed official figures showing a drop in unemployment to a six-year low of 6.4 per cent coincided with surprisingly feeble growth in wages up just 0.6 per cent against inflation running at 1.9 per cent. Separately, the Bank’s Inflation Report halved its predicted wage growth for this year to 1.25 per cent. And even though it raised its forecast for economic growth in 2015, it expected inflation to remain just below its 2 per cent target.

Governor Mark Carney said: “Whatever the causes, these developments point to the economy being able to sustain a higher level of employment and lower rate of unemployment without generating inflationary pressures.”

The selling seen in sterling after this release shows that the markets are finally coming round to the idea that wage and productivity growth along with inflation are going to be the key drivers of monetary policy going forward, not employment

Craig Erlam, market analyst at Alpari

Analysts who had previously pencilled in the first rise in rates from the current level of 0.5 per cent in December, pushed back their forecast for a rise to February.

Craig Erlam, market analyst at Alpari, said: “The selling seen in sterling after this release shows that the markets are finally coming round to the idea that wage and productivity growth along with inflation are going to be the key drivers of monetary policy going forward, not employment.”

Richard Falkenhall, senior foreign exchange strategist at SEB bank, said: “It is quite clear that the Bank will have to move very cautiously when hiking rates and we therefore maintain our below consensus pace on the number of rate hikes and expect only two more hikes in 2015 to 1.25 per cent by the end of 2015.”

Martin Beck, senior economic adviser to the EY Item Club, said: “With the latest earnings data showing rises in pay slumping to another historic low the case for a near-term rise in rates is looking weaker. The dovish tone of the Inflation Report reaffirms our view that a rate hike will have to wait until well into 2015.”

But Robert Wood, chief UK economist at Berenberg, disagreed: “It leaves the door open to a November rate hike, particularly if pay growth improves a little over the coming months and unemployment keeps falling.”